Beyond the reach of the invisible hand: Impediments to economic activity, market failures, and profitability

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Citation: Dennis A. Yao (1988) Beyond the reach of the invisible hand: Impediments to economic activity, market failures, and profitability. Strategic Management Journal (RSS)




Tagged: Business (RSS) economics (RSS), strategy (RSS), management (RSS)


Summary:

Yao makes a simple economic argument that strategic advantage (i.e., supra-normal profits) come from market failures that stem from impediments to market activity. Yao suggests that, unlike Michael Porter who suggests that supra-normal profits extend from (for example) barriers to entry, Yao suggests that it is not the barriers to result in this advantage but the failure of the market to account for them.

The paper is mostly framed in terms of Porter's (1980) influential Competitive strategy: Techniques for analyzing industries and competitors and focuses on questions of barriers to entry which is an important part of Porter's model. Barriers, Yao suggests, are not enough alone. It is only when the perception of these barriers suggests creates information asymmetry that markets become less efficient and strategy becomes less efficient.

For Yao, these market failures comes from either information or power asymmetries. In particular, he lists a large number of barriers to competition which include: (1) production economies (in either economies of scale, learning and scope) and sunk costs, (2) transaction costs and (3) imperfect information. Each of these keep firms from competing efficiently and create windows for supra-normal profits.

Theoretical and practical relevance:

Yao's article's has been cited 80 times in the last 22 years ago but has been cited by a number of very influential papers including Margeret Peteraf's (1993) The cornerstones of competitive advantage: A resource-based view.